US ethane lifts outlook of Canada’s Nova Chemicals

Nova is in the final stages of securing low-cost ethane, an NGL, piped from US shale formations to facilities in Ontario and Alberta -- just south of Canada’s oil sands production region.

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By JACK KASKEY and CECILE GUTSCHER

Bloomberg

Nova Chemicals Corp. debt is trading as if Canadas
largest chemical maker is rated investment grade for the
first time in a decade, with projects set to tap cheap US shale
gas seen cutting costs and swings in earnings.

Credit-default swaps show the cost to insure debt of Nova
against default over five years has dropped 50% since June
2013 to 125 basis points, in line with borrowers rated at the
lowest investment-grade of Baa3, according to Moodys
Analytics. Calgary-based Nova is rated Ba1 by Moodys
Investors Service and BB+ by Standard & Poors, the
highest junk-bond grades for each company.

Nova is in the final stages of securing low-cost ethane, a
natural-gas liquid, piped from US shale formations to facilities in Ontario and Alberta
-- just south of Canadas oil sands production region.
The projects should stabilize
fluctuating earnings and cash flow and eventually boost
profit, said David Fisher, a Toronto-based analyst at
S&P.

We expect the conditions for a possible upgrade to be
met sometime in 2014, Fisher said by phone on May 23.
What we need to see is the company is well on its way
to having the projects fully operational and
that there are not going to be any major execution challenges
as they ramp up.

Nova, which has C$924 million ($850 million) of debt,
hasnt been rated investment grade by S&P since
2002. S&P raised the companys outlook to positive
on Feb. 14.

Yield Spreads

For Nova, being freed from a junk rating would translate into
10-year borrowing costs about 80 basis points, or 0.80
percentage point, lower. The companys 5.25% notes due
in August 2023 yield 4.2%, about 224 basis points more than
government benchmarks, according to Bank of America Merrill
Lynch index data.

US dollar-denominated bonds of investment-grade rated peers
including Dow Chemical and Airgas yield an average 3.36% for
similar-maturity debt, according to the Bank of America
Merrill Lynch US Corporate Chemical Index. By comparison, the
average yield for speculative-grade chemical companies is
5.13%, according to another index.

Nova has secured supplies of ethane for its only two
production sites, both in Canada, as competitors such as Dow
and Westlake Chemical also expand production because of the
cost advantage provided by shale gas.

Nova, owned by the Abu Dhabi governments International
Petroleum Investment Co., turns hydrocarbons such as ethane
into ethylene, the most-used petrochemical, and then into
pellets of polyethylene. The plastic pellets are sold to
makers of shopping bags, food packaging and auto parts, among
other end markets.

Bakken Region

In Joffre, Alberta, located halfway between Calgary and
Edmonton, Nova hasnt been able to run its three
ethylene plants at full capacity because of a shortage of
ethane in the province, said Pace Markowitz, a company
spokesman. Nova has now secured an agreement to buy Hess
Corp. ethane produced in the Bakken shale region of North
Dakota and piped through Saskatchewan to Alberta, he said.

The pipeline will deliver ethane to the Joffre site in the
next several weeks, Markowitz said.

Another part of Novas feedstock diversification plan for
Joffre is securing off-gas extracted by Williams Partners
from oil sands in northern Alberta. The Bakken and oil-sands
feedstocks will allow Joffre to
run at capacity, boosting production by 1 billion lb/year of
ethylene, and the company plans to spend $1 billion to expand
polyethylene production by a similar amount in the first half
of 2016, Markowitz said.

Cracker Capacity

In Corunna, Ontario, about 90 miles north of Detroit, Nova is
investing about $250 million to allow the ethylene plant,
known a cracker, to run entirely on ethane feedstock, up from a maximum of
70% ethane and 30% naphtha, Markowitz said. Sunoco's Mariner
West pipeline in December started bringing Nova ethane from
the Marcellus shale region of western Pennsylvania, he said.

Nova is receiving about 60% of its contracted ethane from the
Marcellus, a level that will rise through the next few
months, Markowitz said. The company plans to spend about $300
million to boost the crackers capacity by 20% and
expand production of polyethylene, he said.

Reducing exposure to oil derivatives and increasing use of
low-cost North American gas is set to improve Novas
financial results, said John Rogers, a New York-based
chemicals analyst at Moodys, which hasnt rated
Nova investment grade since 2002.

Once they get their pipelines in place and they can
show a couple quarters of improved performance, we would
upgrade them, Rogers said May 22. Sometime in the
next few months, we will take a look at that.

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